Rates could slowly rise after today’s hike

Ian Kernohan, Economist

2 November 2017

In a boost for savers, the Bank of England has raised interest rates for the first time in over a decade. A hike was expected, as was a split in the Monetary Policy Committee (MPC) vote, so the market was more interested in the message from the latest Inflation Report. The Bank was keen to stress that any future increases will be limited, and subject to developments related to the process of EU withdrawal.

At 0.5%, the base rate will still be an extremely low level, having been held at this level for most of the period since the financial crisis. This rise merely reverses the ‘insurance’ cut seen in the aftermath of the Brexit referendum. On the other hand, many borrowers will never have experienced a rate rise, so there will be some element of surprise. As long as interest rates rise very gradually from here, then with around 60% of mortgages on fixed-rate deals, the impact on household finances shouldn’t be too severe, and will be offset by any future fall in inflation.

We expect the MPC will raise rates slowly over the next two years, assuming that a Brexit deal is visible by mid-2018, unemployment remains low, and global growth holds up. With inflation set to fall next year as the impact of sterling devaluation wanes, the MPC will stop hiking if there are clear signs that the economy is slowing.

Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.